IBM shifts 401(k) policy to once-a-year matches

Saturday

Dec 8, 2012 at 6:00 AM

By Mark Jewell and Steve Rothwell THE ASSOCIATED PRESS

IBM will begin making contributions to employees’ 401(k) accounts in lump-sum annual payments next year, rather than at the time of each paycheck, in a move that will help the technology company cut retirement plan expenses and may cause other large corporations to follow suit.

Employees were notified this week that matching contributions will be made just once annually, on Dec. 31, beginning next year. “This change reflects our continuing commitment to invest in our employee 401(k) plans while maintaining business competitiveness in a challenging economic environment,” IBM spokesman Doug Shelton said.

The end-of-the-year 401(k) match won’t be unique to IBM, but experts say the company’s move could lead other major employers to consider making less frequent contributions.

“IBM is one of the world’s most influential plan sponsors,” said Mike Alfred, CEO of BrightScope Inc., which rates corporate 401(k) plans. It places IBM’s among the top 30 plans at large employers. “Everyone in the benefits industry will pay close attention to whatever IBM does.”

Across the country, 60 million workers participate in 401(k)s, which have become a key source of retirement savings. Most companies match from 3 percent to 6 percent of the amount the employee contributes to the account. Contributions are exempt from income tax, and investment earnings grow tax-free until withdrawal.

IBM matches an employee’s 401(k) contribution dollar-for-dollar up to 6 percent of eligible pay, for those hired before 2005. Those hired later are eligible to receive up to 5 percent of pay. IBM also makes automatic contributions, ranging from 1 percent to 4 percent of pay, even if the employee doesn’t contribute to the account on their own behalf.

IBM paid $875 million last year in matching and automatic contributions to more than 200,000 eligible employees. The company, based in Armonk, N.Y., had 433,000 employees globally at the end of last year, when it reported nearly $107 billion in revenue.

IBM’s switch to an annual lump-sum matching contribution puts it among a relatively small number of employers taking that approach. About 7 percent of employers offering 401(k)s make contributions once a year, benefits consultant Mercer estimates. About 88 percent make contributions each pay period, with a smaller number using monthly or quarterly distribution schedules.

Companies switching to end-of-the-year matches typically save money because they don’t provide matching contributions for employees who leave during the year, other than those retiring. “The amount of the cost that is saved would vary significantly, depending on the turnover within the organization,” said Alison Borland, a vice president with consulting firm Aon Hewitt.

Also, with annual contributions, Borland noted that a company has more freedom to allocate cash reserves as it sees fit during the course of a year, rather than regularly having to dip into accounts for biweekly matching contributions. Ultimately, however, the contribution must be made, in a lump sum at the end of the year.

Although annual contributions could help the company better manage its finances and cut costs, Alfred, of BrightScope, said IBM’s shift away from biweekly matches isn’t a positive for employees on the whole. Employees could miss out on some investment gains, depending on how the financial markets perform during a given year. That’s because the company will have the cash available until year-end, rather than putting it in employee accounts where it would be invested throughout the year. However, that could be a plus for employees if markets decline.

The potential hit to retirement savings for an employee leaving could be significant.

For example, an employee who earns $45,000 a year and receives a matching contribution capped at 4 percent would get a $1,800 match from the company. But if the worker leaves at the end of September under a policy like IBM’s new one, he or she would give up an accrued value of about $1,405, compared with what the worker could have received in biweekly matches. That example assumes a monthly average investment return of 0.4 percent.

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